The assessee was a foreign company incorporated in Netherlands having its principal branch office in India. In course of its banking activities, the assessee?s said branch in India remitted substantial funds to its head office as payment of interest. The two question raised before Kolkata High Court was whether such interest payment was to be allowed as a deduction in computing the profits of the assessee?s branch in India and whether in making such payment to the head office, the assessee?s said branch was required to deduct tax at source under section 195.
The assessee contended that in terms of the Double Taxation Avoidance Agreement between India and Netherlands, the head office and the permanent establishment in India, i.e., the branch office were to be treated as different entities for the purpose of taxation and interest remitted from India could be deducted as an expense, however, no tax was to be deducted at source, as for such purpose the Indian branch and the foreign head office were to be treated as one entity. The revenue?s contentions, however, were that under section 195(1) there was an obligation of the Indian branch to deduct tax at source while remitting interest to the head office and having not done so, the deduction could not be granted under section 40(a)( i). It was further contended that the head office and the permanent establishment in India were to be taken as separate entities and under the Treaty interest could not be allowed as a deduction.
The issue before , Calcutta High Court in ABN Amro Bank, N.V vs CIT 343 ITR 43;241 CTR 552 (CAL.)/ was
1.Whether interest payment made by the Indian branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant?s branch in India?
2.Whether in making such payment to the head office, the appellant?s said branch was required to deduct tax at source under section 195 of the said Act?
The Calcutta High Court held vide its order 12/23/2010 as under :
18. An unnecessary complication has been created by the interpretation made of section 40(a)( i) of the Income-tax Act read with section 195 of the Act by both the appellant and the respondents. First of all, a proper meaning has to be ascribed to the expression “chargeable” under the provisions of this Act. Section 195(1) says that, if any interest is paid by a person to a foreign company, which interest is chargeable under the provisions of this Act tax should be deducted at source. The word “chargeable” is not to be taken as qualifying only the phrase “any other sum” only but it qualifies the word “interest” also. This interpretation is supported by the phrase in parenthesis, namely, not being income chargeable under the head “Salaries”. Therefore, the meaning of this section is that such interest must be chargeable under the provisions of this Act. To simplify the matter, this interest must be accounted for or credited in the account of some person who is chargeable under the Act. In other words, this remittance of interest must result in an income which is chargeable under the Act. In those circumstances tax may be deducted at source. But where this interest is not so chargeable, no tax is deducted. In this case, by virtue of the above convention, the head office of the appellant is not liable to pay any tax under the Act. Therefore, in our opinion, there was and still is no obligation on the part of the appellant?s said branch to deduct tax while making interest remittance to its head office or any other foreign branch.
19. Therefore, in the circumstances there is no scope for any argument that for the purpose of computation of expenditure the branch and the head office are to be taken as separate entities but for the purpose of payment of tax to be deducted at source on interest payment, it is to be taken as one bank and no deduction is to be made as sought to be made by the learned counsel for the appellant. Such contentions are totally unfounded in our opinion. The permanent establishment and the head office have to be taken as separate entities for all purposes. But in the making of payment of interest no tax has to be deducted under section 195(1), for the reasons above.
20. Therefore, if no tax is deductible under section 195(1), section 40(a)( i) of the Act will not come in the way of the appellant claiming such deduction as from its income. Therefore, in the circumstances the appellant would be entitled to deduct such interest paid, as permitted by the convention or agreement, in the computation of its income.